A Private Limited Company is legally constituted with limited liability or legal protection for its stockholders, but it has ownership limits.
A Private Limited Company is a privately held entity for small businesses. The responsibility of members of a Private restricted Company is restricted to the number of shares they hold. Shares in a Private Limited Company cannot be openly exchanged.
Private Limited Company is the most basic and popular type of business registration in India. It can be registered with at least two people. Its limited liability protection for shareholders, ability to obtain equity money, and independent legal entity status make it the most recommended type of business structure for millions of small and medium-sized firms that are family-owned or professionally managed.
Minimum Requirements for Private Limited Companies
- A minimum of two directors who are adults.
- One of the Directors of a Private Limited Company must be an Indian Citizen and Resident.
- The other director(s) could be a foreign national.
- In addition, a firm must have two shareholders.
- Shareholders may be genuine humans or artificial legal entities.
Advantages of private limited company
No Minimum Capital
There is no minimum capital necessary to establish a Private Limited Company. A Private Limited Company can be formed with just Rs. 10,000 in total authorized share capital.
- Separate Legal Entity
A Private Limited Company is a separate legal entity in the eyes of the law, which means that the assets and liabilities of the firm are not the same as the Directors’. Both are counted differently. A Private Limited Company separates management from ownership, so managers are both responsible for the company’s success and accountable for its loss.
- Limited Liability.
If the company experiences financial difficulties for whatever reason, the personal assets of members will not be used to cover the Company’s debts because the person’s liability is limited.
For example, if a Private Limited Company takes out a loan and is unable to repay it, the members are only accountable for paying the amount they owe towards their individual shares, known as the unpaid share value. This means that if you have no balance outstanding for the number of shares you own, you are not liable for any debt owed by the company, even if the debt/credit amount remains unpaid.
- Fund Raising
In India, save for Public Limited Companies, the only type of firm that can raise capital from Venture Capitalists or Angel investors is a Private Limited Company.
- Transferring shares is free and easy.
A shareholder can transfer his or her shares in a business limited by shares to anyone else. The transfer is simpler than transferring a stake in a business that is conducted as a sole proprietorship or partnership. Transferring shares is as simple as filling out and signing a share transfer form and handing over the shares to the buyer, accompanied with a share certificate.
- Uninterrupted existence.
A Private Limited Company has ‘Perpetual Succession’, which refers to its continuing or unbroken existence until it is lawfully dissolved. A business, as a separate legal entity, is unaffected by the death or departure of any member and continues to exist despite changes in membership. “Perpetual Succession” is one of the most significant aspects of a firm.
- FDI allowed.
A Private Limited Company allows 100% Foreign Direct Investment, which means that any foreign business or individual can invest directly in it.
- Boosts credibility
The company’s information is published on a public database. This increases the company’s credibility by making it easier to authenticate the details.
Disadvantages of Private Limited company
- Limitation on the Transferability of shares
The Articles of Association of a private limited company impose limitations on the ability to transmit its shares. It signifies that members of a private limited company are not permitted to transfer their shares at will. ‘Right of Pre-emption’ restrictions are typically imposed on the transfer of shares by these categories of corporations. Right of Pre-emption stipulates that prior to offering his shares for sale to other members of the private limited company, a member may sell his shares.
Additionally, directors may decline to record the transfer of shares if permitted to do so by the company’s articles. Share transfer restrictions can be imposed by a private limited company in an additional manner.
- Limited Number of Members
The number of members that can be included in a private limited company is restricted. The organization is restricted to a maximum of 200 members, exclusive of current and former employees who possess company shares. Thus, in contrast to a publicly traded corporation, it is not permissible to have an indefinite number of members.
- Prohibition on Public Offering of Shares
The shares of a private limited company are not available for subscription by the general public. This means that a private limited company is unable to distribute a prospectus, which is a form of public invitation.
Further, it signifies that the shares of a private limited company are not eligible for trading on a stock exchange. This reduces the likelihood of the company experiencing growth and expansion.
- Increased Costs of Incorporation and Compliance
The incorporation fee for a private limited company is considerably greater than that of a partnership or sole proprietorship. Name reservation fees, stamp duty, and other charges are incurred by a business in order to register with the ROC of the appropriate state.
Furthermore, subsequent to its incorporation, a corporation is obligated to submit various MCA forms and returns, income tax returns, statutory register maintenance, and more. The compliance expenses of a private limited company are thus also substantial.
- Restricted Authority of Owners
A corporation exhibits a wide ownership structure due to the participation of numerous investors or proprietors in its funding. The owner’s control is thereby constrained due to the extensive distribution of power, as each shareholder exerts a proportional impact on the decision-making process. Numerous decisions are reached by shareholders via straightforward majority vote at general meetings. Additionally, certain resolutions require a minimum of 75% shareholder support.
As a result, the authority to make decisions is distributed among all shareholders of the company, regardless of whether it remains under the sole control of the proprietor.
